What is “behavioral economics”? The dictionary definition is: “a method of economic analysis that applies psychological insights into human behavior to explain economic decision-making.”
Behavioral economics explains why people continue to smoke even though they know it’s expensive and unhealthy. It explains why people, who know better, still under-save for retirement. In other words, behavioral economics explains why people make choices that are not in their best interests – at home and at work.
Corporate managers have traditionally believed that employees will make decisions in their own best interests and that money is the best motivator. Recent studies from The Incentive Research Foundation (IRF) are debunking these beliefs. These studies and surveys are showing that employees make decisions based on emotion, so behavioral economics is proving to be a much better indicator of what motivates employees than traditional economics. Behavioral economics also helps explain why some incentives are more effective than others. Once understood, managers and program designers can apply these principles to their own businesses.
The IRF also found that both intrinsic and extrinsic awards are experienced with the feeling of being rewarded in our brains. Employees who feel recognized, appreciated and rewarded are more engaged. These findings are important because now managers can strategically build a more effective, rewarding work environment.
Richard Thaler, recent winner of the Nobel Memorial Prize in Economic Sciences, introduces “nudge units” as a way to influence behavior in his book, Nudge: Improving Decisions about Health, Wealth and Happiness. In our All Star Incentive Marketing world, we would equate these “nudge units” with incentives. One example given in the book describes a program whereby employee groups are encouraged to stop smoking. Groups that were offered incentives (or “nudge units” were more successful than groups that were provided only with information as to the dangers and high cost of smoking.
Employee incentive programs that reward and recognize employees for achieving goals that benefit the company have been proven highly effective with a measurable return on investment. Behavioral economics helps to explain why employees will work harder and smarter to achieve more when offered the right targeted incentive. This tactic is far more effective than simply providing workers with information as to how their behavior will benefit the company’s profitability and their own success at work.
Managers and program designers who consider the role that emotions play in the decisions their employee make will be on the path to a more engaged workforce.
Contact one of our Incentive Professionals today to start designing a more effective employee recognition/rewards program based on behavioral economics for your organization! 800-526-8629